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While the main electricity providers in the UK are well consolidated, there are increasing opportunities for deals among smaller renewable energy developers and providers.

For energy provider Scottish Power plc, it was an offer too good to refuse. When Spanish rival Iberdrola approached the company with an £11.6 billion offer in March, it was overwhelmingly supported by shareholders.

The support seemed a volte face from its stance back in 2005, when Glasgow-based Scottish Power fought off a bid from German provider E.ON – owner of Powergen – apparently determined to stay UK owned.

But the temptation of 777p per share was too much for Scottish Power’s executives to resist and they sold out to become the latest in a string of UK businesses to come under Spanish ownership.

However, deals on the scale of Iberdrola’s acquisition have been scarce, with traditional power suppliers now well consolidated in the UK. The bulk of M&A activity has been at the small-to-medium end of the market, largely among emerging renewable energy providers and developers.

For example, Infinis, a Northampton-based renewable power provider, bought RE-Gen, a 43.5MW biogas power generation business, for £80 million in January from waste treatment and renewable energy firm Summerleaze.

Come together

But there is not only M&A activity in the sector; some large businesses are seeking strategic partnerships with smaller renewable energy developers and providers. For example, waste-to-energy provider Compact Power plc has recently signed an agreement with Severn Trent to build and operate plants to convert sewage sludge and other biomass feedstocks into renewable energy.

The first plant is expected to be operational by 2009, according to the companies. After announcing the deal AIM-listed Compact Power’s share price jumped by more than 2p to 27.25p.

Compact Power’s chief executive John Acton said that although the larger players are still cautious about investing in renewable technology, he believes there will be more going into partnerships with smaller providers, which could lead to a full acquisition further down the line. “It’ll be toe in water and if the water’s nice, they’ll jump in,” he said.

With the market starting to mature, Acton believes larger providers will be increasingly keen to get into the renewable market, although only with proven revenue-generating technologies.

Indeed, the government-set target in the 2002 Renewables Obligation of 10% of electricity to come from renewable sources by 2010 – last year it was about 5% – is beginning to focus energy providers’ minds as the date looms on the horizon. This will lead to a spike in acquisitions and partnerships as the target date comes closer, Acton said.

Not only this, but by 2020 the government has stipulated that renewable sources should make up 20% of energy provided, which indicates that the market is guaranteed growth for years to come.

Long haul

Meanwhile, renewable energy firms continue to join the capital markets. Helius Energy plc, which builds and operates biomass power generation plants, joined AIM on January 31 raising more than £2 million on its debut.

But such firms can be a long-term punt for investors. Helius announced a £1.2 million pre-tax loss in its interim results for the six months ended March 31, 2007, compared to a loss of some £229,000 for the previous year. Chairman Alex Worrall said this loss was down to its continuing investment in the business and was in line with the company’s expectations. As a result, Helius offered no dividend.

Perhaps as a result of this, at the time of writing Helius’ share price had lost more than 20% of its value in the six months since it joined AIM, standing at 32p. Its market cap is now £22.3 million.

Acton agrees that renewable energy plays are a long-term investment, which can lead to a degree of illiquidity in shares. “Our investors tend to be long term shareholders who for a variety of reasons are supporting the company,” he said. “They have been resolved not to let any shares go, so there has been quite a shortage. Therefore, people who want to come in have inevitably had an effect on [share] price.

“I don’t think those long-term investors believe the market has yet delivered all it is going to deliver and they are still going to sit tight.”

With the effects of legislation, falling costs and market forces all coming to favour renewable energy companies, the medium term future looks promising for investors. But Acton is savvy enough to know success is not a given. “We’ve still got to deliver,” he said. “If we deliver, I think it is going to be very good, but that’s the challenge.”

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